Ways to Bet Against the Buck

Neil George, editor of Personal Finance, says the US dollar doesn’t look as if it will strengthen soon, and he suggests some ETFs that let people invest in other currencies.

When it comes right down to it, a currency is much like the stock of a country. And right now, when it comes to the US, our stock isn’t finding many eager buyers. But unlike a regular stock, we can’t just sell the dollar; the alternative is to exchange the greenback for another currency.

What if you want to invest or trade currencies directly in order to cash in on more woes for the US dollar? With the world’s pessimistic view of the greenback, it’s increasingly enticing to enter the foreign exchange markets. [One] alternative is to look at exchange traded funds (ETFs) that track many of the leading currencies and trade just like stocks.

In general, we avoid ETFs like the plague. However, there are specific, significant differences between currency ETFs and stock or bond ETFs. Unlike a stock or bond ETF, those that track currencies aren’t picking baskets of stocks or bonds; they feature one asset, a currency. This means we aren’t buying the inherent mediocrity of a stock index or a pig in a poke, just the currency.

We still have some intraday uncertainty about what the internal assets and liabilities of the currency ETFs may be, but we can easily and quickly price the ETFs against the direct currency prices in the foreign exchange markets. It’s a compromise, but one we’re willing to make. We’ve studied the market and concluded that the CurrencyShares ETFs tend to be priced and valued close enough to the underlying actual currencies and bear yields that are right on top of local bank deposit rates.

If you want to speculate beyond our core stock and bond holdings with foreign exposure, look to the Rydex Fund-managed CurrencySharesseries. Start with the current favorite antidollar play, the euro. CurrencyShares Euro Trust (NYSEArca: FXE) has gained 4.7% year to date [as of late March], compared with 5.2% for the euro in the actual interbank currency market.

But there’s a kicker with the ETF: It earns an implied yield of the euro with a dividend rate of about 3.2%, compared to London bank-to-bank deposit rates (LIBID) of approximately 4.1%. The overall return so far this year for investors in the euro ETF is running close to 5.6%—without the drama of foreign bank accounts and trading schemes.